(Preparation of a consolidated balance sheet on the date a subsidiary is purchased, LO 1) On January 31, 2006, Paju Inc. (Paju) purchased 100% of the common shares of Shellmouth Ltd. (Shellmouth) for $5,000,000 in cash. Paju’s and Shellmouth’s balance sheets on January 31, 2006 just before the purchase were:

Management determined that the fair values of Shellmouth’s assets and liabilities were as follows:

Required Prepare the journal entry that Paju would prepare to record its purchase of Shellmouth’s shares.
Prepare the journal entry that Shellmouth would prepare to record its purchase by Paju.
. Prepare Paju’s balance sheet immediately following the purchase.
. Calculate the amount of goodwill that would be reported on Paju’s consolidated balance sheet on January 31, 2006.
. Prepare Paju’s consolidated balance sheet on January 31, 2006.
Calculate the current ratios and debt-to-equity ratios for Paju, Shellmouth, and for the consolidated balance sheet. Interpret the differences between the ratios. When calculating the ratios, use Paju’s and Shellmouth’s balance sheets after the purchase had been made and recorded.

g. You are a potential investor who has been asked to purchase a 25% equity interest in Shellmouth (you would purchase the shares from Shellmouth, not from Paju). Which balance sheets would you be interested in viewing? Explain.
How would you use Paju’s consolidated financial statements in making your lending decision? What concerns would you have about making an equity investment in Shellmouth?

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Balance Sheets As of January 31, 2006 Paju Inc. Shellmouth Ltd. Current assets Capital assets $ 6,000,000 $4,500,000 Total assets 11,750,000 $17,750,000 1,500,000 $6,000,000 Current liabilities $ 1,200,000 $1,500,000 Non-current liabilities 6,000,000 500,000 Capital stock 7,500,000 3,000,000 Retained earnings 3,050,000 1,000,000 Total liabilities and shareholders' equity $17,750,000 $6,000,000